Mumbai: BAE Systems Plc has selected Mahindra Defence Systems Ltd, the defence production firm of the Mahindra Group, as its business partner for the proposed in-country assembly, integration and test (AIT) facility for the M777 Ultra Lightweight Howitzer.

India and the US are in discussions for a foreign military sale (FMS) of 145 M777A2 LW155 Howitzers for the Indian Army.

“BAE Systems looks forward to working with Mahindra in the coming weeks to finalize details of this AIT facility and to negotiate the terms of its contractual arrangement,” Mahindra Defence said in a statement on Wednesday.

In 2015, Mahindra Defence developed and submitted a US government-supported proposal, offering a higher degree of indigenization on the M777 weapon system.

The highlight of this is the commitment to establish AIT capabilities in India in partnership with a domestic Indian company.

“The selection follows a detailed assessment of Mahindra’s ability to fulfil the requirements and provide the best value to the M777 India programme, and in the future, grow its capability as a strategic partner for BAE Systems in India,” Mahindra Defence said.

Joe Senftle, vice-president and general manager (weapon systems), BAE Systems Inc., said the facility is a fundamental part of the M777 production line and a domestic AIT facility will enable the Indian Army to access maintenance, spares and support for the M777 locally.

“We will continue to support the two governments to progress to contract agreement so that we may begin the process of Make in India for M777,” Senftle said.

S.P. Shukla, group president, Mahindra Defence and Aerospace, Mahindra Group, said that M777 will give Indian defence forces the much-needed operational advantage and access to state-of-the-art technology.

“Mahindra M777 facility will also ensure that the life cycle support is available locally, thereby enhancing operational availability of the guns. We look forward to making a major contribution to our defence forces and economy of India,” said Shukla.

Prime Minister Narendra Modi’s emphasis on defence equipment forming part of his Make in India campaign to encourage manufacturing and attract foreign investment has seen a scramble among companies for licences to manufacture defence equipment.

Last week, Modi kick-started the Make In India Week on 13 February in Mumbai to support the campaign. It will conclude on 18 February.

Private sector manufacturers have an opportunity to pick up a 25% share of defence production, said A.K. Gupta, secretary, department of defence production, ministry of defence, on Tuesday.

“Around 25% of the defence PSU (public sector undertaking) turnover can be off-loaded to the private sector, and the ministry has already de-licensed 60-70% of the production,” Gupta said, speaking at a session on defence at the Make in India Week convention in Mumbai.

India will see a total defence budget allocation of $620 billion between fiscal years 2014 and 2022, of which 50% will be capital expenditure, according to a report released in February 2015 by lobby group Federation of Indian Chambers of Commerce and Industry and financial services company Centrum Capital Ltd.

The annual opportunity for Indian companies—both state-owned and private—is expected to touch $41 billion by fiscal year 2022 and $168 billion cumulatively, it said.

India is the world’s largest importer of defence equipment, according to the Stockholm International Peace Research Institute. It spends around $24 billion a year on defence equipment.

On 24 January, Mahindra Defence Systems and Europe’s Airbus Helicopters signed a so-called statement of intent to produce military helicopters in India.

The companies plan to set up a final assembly line in India, develop tier-1 and tier-2 suppliers and make extensive transfer of technology, to achieve 50% indigenous content.

In July 2015, Mahindra Defence and Airbus Helicopters had signed an in-principle agreement to set up a joint venture to manufacture helicopters in India, seeking to tap a military hardware market estimated to grow to $41 billion in seven years.

A statement of intent reflects the firm commitment of both companies to make helicopters locally. Both companies will identify potential industrial sites, screening of existing local supply chain and defining initial work packages to be transferred to India.

The Mahindra Group’s strategy for the defence business is largely inorganic. Over the last eight months, the group has stitched together at least four alliances with global engineering and technology firms to strengthen and expand its capabilities in the defence business as the Mahindra Group, like others including the Tata group and Larsen and Toubro Ltd, seeks to benefit from the government’s focus on encouraging local manufacture of defence equipment. At least three of the four alliances are in the aerospace sector.

“It remains to be seen whether the Indian ministry of defence actually signs a contract on the M-777 on an agreed formula where Indian companies share some of the workload of the original equipment manufacturer,” Deba R. Mohanty, chief executive at Indicia Research & Advisory.

“It then comes down to the nitty gritty of how the BAE and Mahindra work it out. It sounds fine, but finer points are yet to be worked out.”

“An earlier joint venture between BAE and Mahindra was rejected by the foreign investment promotion board during the last regime. One is not sceptical, but fructification of a joint effort is yet to be seen on the ground,” Mohanty added.

Mohanty cautioned that this is a proposed contract, which bends foreign military sales into a offset-based acquisition, where an Indian partner would be required.

”This is not as easy as it looks at the very outset,” Mohanty said.

Offset, currently, is a provision that requires any foreign arms manufacturer securing an order worth more than Rs.300 crore from India to source components worth 30% of the value of the order from India.

The government has now proposed to revise this so-called defence offset clause, which will be applied to contracts of more than Rs.2,000 crore instead of the current Rs.300 crore, thereby removing a hurdle to foreign companies eyeing the Indian market.